MANAGEMENT ACCOUNTING

DefinitionManagement accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization's strategy"

Traditional vs innovative practices.

Within the area of management accounting, there are almost an infinite number of tools, methods, techniques and approaches floating around.

The distinction between traditional and innovative accounting practices is perhaps best illustrated with the visual timeline (see sidebar) of managerial costing approaches presented at the Institute of Management Accountants 2011 Annual Conference.

Traditional standard costing (TSC), used in cost accounting, dates back to the 1920s and is a central method in management accounting practiced today because it is used for financial statement reporting for the valuation of income statement and balance sheet line items such as cost of goods sold (COGS) and inventory valuation. Traditional standard costing must comply with generally accepted accounting principles (GAAP US) and actually aligns itself more with answering financial accounting requirements rather than providing solutions for management accountants. Traditional approaches limit themselves by defining cost behavior only in terms of production or sales volume.

In the late 1980s, accounting practitioners and educators were heavily criticized because management accounting practices (and, even more so, the curriculum taught to accounting students) had changed little over the preceding 60 years, despite radical changes in the business environment. In 1993, the Accounting Education Change Commission Statement Number 4 calls for faculty members to come down from their ivory towers and expand their knowledge about the actual practice of accounting in the workplace. Professional accounting institutes, perhaps fearing that management accountants would increasingly be seen as superfluous in business organizations, subsequently devoted considerable resources to the development of a more innovative skills set for management accountants.

Variance analysis is a systematic approach to the comparison of the actual and budgeted costs of the raw materials and labor used during a production period. While some form of variance analysis is still used by most manufacturing firms, it nowadays tends to be used in conjunction with innovative techniques such as life cycle cost analysis and activity-based costing, which are designed with specific aspects of the modern business environment in mind. life-cycle costing recognizes that managers' ability to influence the cost of manufacturing a product is at its greatest when the product is still at the design stage of its product life-cycle (i.e., before the design has been finalized and production commenced), since small changes to the product design may lead to significant savings in the cost of manufacturing the products.

Activity-based costing (ABC) recognizes that, in modern factories, most manufacturing costs are determined by the amount of 'activities' (e.g., the number of production runs per month, and the amount of production equipment idle time) and that the key to effective cost control is therefore optimizing the efficiency of these activities. Both lifecycle costing and activity-based costing recognize that, in the typical modern factory, the avoidance of disruptive events (such as machine

breakdowns and quality control failures) is of far greater importance than (for example) reducing the costs of raw materials. Activity-based costing also deemphasizes direct labor as a cost driver and concentrates instead on activities that drive costs, As the provision of a service or the production of a product component.

Other approach that can be viewed as innovative to the U.S. is the German approach, Grenzplankostenrechnung (GPK). Although it has been in practiced in Europe for more than 50 years, neither GPK nor the proper treatment of ‘unused capacity’ is widely practiced in the U.S. GPK nor the concept of unused capacity is slowly becoming more recognized in America, and "could easily be considered 'advanced' by U.S. standards

One of the more innovative accounting practices available today is resource consumption accounting (RCA). RCA has been recognized by the International Federation of Accountants (IFAC) as a "sophisticated approach at the upper levels of the continuum of costing techniques"[8] because it provides the ability to derive costs directly from operational resource data or to isolate and measure unused capacity costs. RCA was derived by taking the best costing characteristics of the German management accounting approach Grenzplankostenrechnung (GPK), and combining the use of activity-based drivers when needed, such as those used in activity-based costing. With the RCA approach, resources and their costs are considered as "foundational to robust cost modeling and managerial decision support, because an organization's costs and revenues are all a function of the resources and the individual capacities that produce them".

Specific methodologies

Activity-based costing (ABC)

Activity-based costing was first clearly defined in 1987 by Robert S. Kaplan and W. Bruns as a chapter in their book Accounting and Management: A Field Study Perspective. They initially focused on the manufacturing industry, where increasing technology and productivity improvements have reduced the relative proportion of the direct costs of labor and materials, but have increased relative proportion of indirect costs. For example, increased automation has reduced labor, which is a direct cost, but has increased depreciation, which is an indirect cost.

Grenzplankostenrechnung

Grenzplankostenrechnung is a German costing methodology, developed in the late 1940s and 1960s, designed to provide a consistent and accurate application of how managerial costs are calculated and assigned to a product or service. The term Grenzplankostenrechnung, often referred to as GPK, has best been translated as either marginal planned cost accounting or flexible analytic cost planning and accounting.

The origins of GPK are credited to Hans Georg Plaut, an automotive engineer, and Wolfgang Kilger, an academic, working towards the mutual goal of identifying and delivering a sustained methodology designed to correct and enhance cost accounting information. GPK is published in cost accounting textbooks, notably Flexible Plankostenrechnung und Deckungsbeitragsrechnung and taught at German-speaking universities.

Lean accounting (accounting for lean enterprise)

In the mid- to late-1990s several books were written about accounting in the lean enterprise (companies implementing elements of the Toyota Production System). The term lean accounting was coined during that period. These books contest that traditional accounting methods are better suited for mass production and do not support or measure good business practices in just-in-time manufacturing and services. The movement reached a tipping point during the 2005 Lean Accounting Summit in Dearborn, Michigan, United States. 320 individuals attended and discussed the merits of a new approach to accounting in the lean enterprise. 520 individuals attended the 2nd annual conference in 2006 and has varied between 250 and 600 attendees since that time.

Resource consumption accounting (RCA)

Resource consumption accounting (RCA) is formally defined as a dynamic, fully integrated, principle-based, and comprehensive management accounting approach that provides managers with decision support information for enterprise optimization. RCA emerged as a management accounting approach around 2000 and was subsequently developed at CAM-I the Consortium for Advanced Manufacturing–International, in a Cost Management Section RCA interest group in December 2001.

Throughput accounting

The most significant recent direction in managerial accounting is throughput accounting; which recognizes the interdependencies of modern production processes. For any given product, customer or supplier, it is a tool to measure the contribution per unit of constrained resource.

Transfer pricing

Management accounting is an applied discipline used in various industries. The specific functions and principles followed can vary based on the industry. Management accounting principles in banking are specialized but do have some common fundamental concepts used whether the industry is manufacturing based or service oriented. For example, transfer pricing is a concept used in manufacturing but is also applied in banking. It is a fundamental principle used in assigning value and revenue attribution to the various business units. Essentially, transfer pricing in banking is the method of assigning the interest rate risk of the bank to the various funding sources and uses of the enterprise. Thus, the bank's corporate treasury department will assign funding charges to the business units for their use of the bank's resources when they make loans to clients. The treasury department will also assign funding credit to business units who bring in deposits (resources) to the bank. Although the funds transfer pricing process is primarily applicable to the loans and deposits of the various banking units, this proactive is applied to all assets and liabilities of the business segment. Once transfer pricing is applied and any other management accounting entries or adjustments are posted to the ledger (which are usually memo accounts and are not included in the legal entity results), the business units are able to produce segment financial results, which are used by both internal and external users to evaluate performance.

Tasks/ services provided.Listed below are the primary tasks/services performed by management accountants. The degree of complexity relative to these activities are dependent on the experience level and abilities of any one individual.

Rate and volume analysis

Business metrics development

Price modeling

Product profitability

Geographic vs. industry or client segment reporting

Sales management scorecards

Cost analysis

Cost–benefit analysis

Cost-volume-profit analysis

Life cycle cost analysis

Client profitability analysis

IT cost transparency

Capital budgeting

Buy vs. lease analysis

Strategic planning

Strategic management advice

Internal financial presentation and communication

Sales forecasting

Financial forecasting

Annual budgeting

Cost allocation

List of vocabulary (new words about the topic).Balance sheet: A statement of the financial position of an entity showing assets, liabilities and ownership claim.

Direct cost: Cost that is directly traceable to an identifiable unit, such as a product or service or department of the business, for which costs are to be determined.

ABC: See activity-based costing.

Activity-based costing (ABC): traces overhead costs to products by focusing on the activities that drive costs (cause costs to occur).

AMTs: See advanced manufacturing technologies.

Annual report: A document produced each year by limited liability companies containing the accounting information required by law. Larger companies also provide information and pictures of the activities of the company.

Assets: Rights or other access to future economic benefits controlled by an entity as a result of past transactions or events.

Capital budgeting: A process of management accounting which assists management decision making by providing information on the investment in a project and the benefits to be obtained from that project, and by monitoring the performance of the project subsequent to its implementation.

Responsibilities of an accountant manager.The responsibilities of an account manager can vary depending on the industry they work in, size of the company, and nature of the business. For instance, each customer account can vary in demands and an account manager may work with brand managers for one account and a media department for another. Account managers usually report directly to the account director or agency director of the activity and status of accounts and transactions. An account manager may also manage a single account or a variety of accounts depending on the requirement of the company. Although the responsibility can vary between companies and between accounts, there are a shared set of common responsibilities, which are as follows:

Generate sales for a portfolio of accounts and reach the company's sales target

Identify new sales opportunities within existing accounts to remain a client-account manager relationship by up-selling and cross-selling:

Manage and solve conflicts with clients

Interact and coordinate with the sales team and other staff members in other departments working on the same account

Establish budgets with the client and company

Meet time deadlines for accounts

References: http://en.wikipedia.org/wiki/Account_manager

Earl D. Honeycutt, John B. Ford, Antonis C. Simintiras (2003), Sales management: a global perspective

http://smallbusiness.chron.com/duties-responsibilities-account-manager-875.html

http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Management_accounting.html